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Is America Bankrupt?

The yield on the U.S. ten-year treasury dipped below 1.40% this morning, the lowest in recorded history. Why does money continue to flow into this perceived “safe haven?” Is America really financially stronger than the rest of the world or are we bankrupt? To illustrate, allow me to introduce, “The Satirical World of Bob.”

Bob was an articulate, charismatic guy with a decent paying job. He did, however, possess a penchant for the good life and was motivated enough to do whatever it took to achieve it. When his first credit card application arrived in the mail – along with the normal circulars and other advertisements – he quickly grabbed a pen, filled it out and sent it in. Within two weeks, Bob had received his first plastic money machine. Machine I say, because in Bob’s mind, a credit card was like creating money out of thin air. Shortly thereafter, he had acquired 3 additional cards. After an extended shopping spree, Bob was the proud owner of a new state-of-the-art boat complete with all the requisite fishing gear, a few HD-TV’s, computers, various kitchen appliances, and whatever else he desired. Without much effort at all, his cards were soon maxed out. What did Bob do? Why, he got more credit cards, that’s what. In fact, in a few months, Bob had 24 credit cards, each at their limit, putting him exactly $1,200,000 in the red. With an annual income of only $75,000, his debt-to-income ratio was a staggering…..well let’s just say he was having trouble paying the minimum payment. What did Bob do? More credit cards? No! Bob figured he needed more income so he went job hunting.

Bob had always been an avid news buff and enjoyed a good political debate from time to time. In fact, this congenial chap always fancied himself as the consummate soft-hearted, social minded sort. To him, the government seemed like a perfect fit for his spending proclivities. After all, he felt the massive federal debt was as necessary as mother’s milk is to a newborn babe. He also fancied the way the government could print new money without anything to back it up anytime it so desired. To him, deficits were just a normal part of life.

Before we return to our story, let’s exit our “Satirical World of Bob” and focus on a most pressing matter. FACT: The U.S. government is bankrupt! Yes, bankrupt. Skeptical? Ok, I’ll provide some facts and you decide.

The government has an “official” debt of $15.8 trillion and mounting. But wait, there’s more. This doesn’t include the liability from Social Security and Medicare. When you factor these in, the amount according to some, exceeds $120 trillion. With U.S. Federal tax revenue of just over $2.3 trillion, that puts our debt-to-income ratio somewhere around 5,082%. Now let me ask you. If you, as an individual, entered your local bank and asked for a loan with a similar debt-to-income ratio, what do you think the loan officer would say? Would they give you the loan? Now let’s return to Bob.

Bob ultimately found employment in Congress where he became one of the biggest spenders on the hill. He was re-elected several times by his constituents as they especially liked how Bob could “bring home the bacon.” In fact, Bob became rather wealthy in the process. From his vantage, there was no problem. Besides, as long as the boat remained afloat, everything was fine. However, when the children and grandchildren of his constituents became adults, their tax rate exceeded 75% and lost the desire to work hard since they could only keep about 25 cents of every dollar they earned.

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To make the arguments that the US is close to fiscal calamity is fair enough but the fictitious Bob is a shallow shot at the social contract we all must keep if we are to maintain a forward moving society. The important question was not approached “Why are people and institutions running for dollars when all the fiscal vital signs indicate systemic problems?”

I agree with michael in that the analogy comparing a country to personal finance is not a correct one.

The difference between the us and bob is many. For 1 bob has to borrow his money from the bank. The us can create money out of thin air. Obviously debasing the currency has consequences as a hidden tax on all of us but if for some strange reason the US had to pay all its debts tomorrow it could be done with real money. Bob doesnt have that option he would go bankrupt and have all his stuff collected by his creditors. Thats the second major difference between the US and bob is that who lent us the 15 trillion dollars exactly and how can they possibly force collection? The US is in debt to bondholder who dont gain if the dollar collapses.

Greece got into a similar situation by getting into crazy amounts of debts that couldnt be paid back. The difference between greece and the US however is that if the EU just creates money out of thin air to pay the debt it debases the euro affecting all of Europe. If greece was kicked out of the EU the debt would basically be defaulted upon because greece has very little industry backing up its money and its currency would get spread so thin it would be rendered practically useless also debasing the Euro affecting all of Europe.

This really would be tough to happen to the US for several reasons. The first being the dollar is the worlds reserve currency were it to collapse all at once the entire world economy would collapse as well. Also the US has the ability to raise tremendous amounts of capital if it needed to. Tax rates in the US are actually quite low compared with many other nations and if raised dramatically could if needed raise enough money to make substantial payments on the debts saving the dollars value if there were a run on the dollar. In your analogy this would be equivalent to bob being in charge of what his salary was and could choose to double it if he wanted to.

I agree with you that deficits matter. Changes will need to be made to make certain things sustainable in the US with an aging population. But the notion that the US is somehow going bankrupt anytime soon isnt accurate. Also counting up future debts as if theyve already happened to make your point isnt quite correct. That’d be like bobs gym saying they were going to charge him an extra hundred thousand a month in 20 years and you counting that as bobs current debt because one day he will likely be paying for it unless he switches gyms before then.

Why are investors buying 1.5% Treasuries? Where else to put the money: in a bank in Mexico, South America, Africa, Greece, Spain, Ireland, China, Japan?

Your calculus on the liabilities of the United States is flawed I’m afraid. What you have done is accrue the liabilities of the country but have forgotten to accrue the assets. Uncle Sam is on the cash basis presently, but if you want to switch to accrual please be consistent with both sides of the balance sheet.

Yes, there are huge Social Security and Medicare liabilities out there. However, little of this gets paid unless workers put into the system. Accordingly, you need to accrue the present value of the contributions to be made – as a receivable. And don’t forget to capitalize as assets on your accrual balance sheet the value of the armed forces and equipment in place, the land and mineral rights owned, Fort Knox, federal office buildings, the federal reserve, national parks, interstate highway system, and yes the Constitution and Declaration of Independence which give the real power to this incredible country of ours.

This is a subject I find extremely interesting and hard to understand why more people don’t get it, am I right in thinking that America is the owner of the petrodollar, taking advantage of the fact that all oil in the world is paid for in US dollars (something president Reagan signed in) and attacking any country that threatens or moves to buy oil with another currency or with gold ie. Iraq, Libya and Iran (who is buying oil with the Yuanne now). I agree that America isn’t living within its means and it’s only a matter of time before oil is paid for in another currency and the US dollar goes down the drain, it’s a matter of when not if.